Hillman on Carbon Taxes and the WTO

Former AB Member Jennifer Hillman has a new paper on carbon taxes and WTO rules. Some excerpts:

Can such a carbon tax be applied in a way that
does not violate U.S. obligations under the WTO
Agreements? I believe the answer is yes, provided
that policymakers carefully design such a tax,
keeping in mind the basic requirements of the
WTO not to discriminate in favor of domestic
producers or to favor imports from certain countries over others. The key is to structure any accompanying border measure as a straightforward extension of the domestic climate policy to imports. If so
designed, there should be few questions about the
measure’s consistency with the WTO rules. Even if
questions were raised, the United States would have
strong defenses within the WTO system. And even
if those defenses were somehow to fail, the United
States would be able to make adjustments should
some aspect of its carbon tax system be found
wanting. A non-discriminatory tax enacted in good
faith to address climate change should pass muster
with the WTO. Therefore, the threat of WTO
challenges should not deter policymakers from
adopting a carbon tax system now.

...

If Congress enacts a carbon tax to address climate
change, streamline domestic energy policy,
raise revenues, or reduce distortions in the tax
system, it must be ready to address the competitiveness concerns of U.S. companies. It could do so by
applying the same tax to imports coming into the
United States as they apply to domestic goods in
order to ensure that everyone competes on a level
playing field and that everyone has the same incentive to reduce their carbon footprint. To ensure that
U.S. companies are not disadvantaged when they
try to export their products to foreign markets,
the carbon tax could be rebated to U.S. companies
whenever they export the products on which the
carbon tax was assessed.

Each of these steps is permitted under the WTO
rules provided: 1) that the tax is designed to fall
within the parameters of an “indirect” tax on products rather than a direct tax on the producers themselves; and 2) that any parallel taxes on imports or
rebates on exports do not discriminate in favor of
U.S. products. Policymakers have sufficient latitude
within this framework to design and implement a
carbon tax system that represents a good faith effort
to reduce carbon emissions while encouraging
all other countries to cut their emissions too, all
while preserving the competitive position of U.S.
companies. Policymakers can be bold. The WTO
will recognize genuine climate change measures for
what they are and is unlikely to find fault with such
measures, provided they do not unfairly discriminate in favor of U.S. companies.

As a WTO legal matter, that all sounds right to me.

But what about the issue of PPMs, which a friend of mine raised? There is a view out there that discrimination against like products based on their production or processing method violates WTO rules.

I don't know what Jennifer's thoughts are on this, but in my view recent WTO jurisprudence makes it fairly clear that measures will not violate WTO law simply because they affect the production or processing method. I don't want to get into all the provisions that might possibly come up in this regard, but just speaking very generally, it seems to me that if you can show a legitimate objective for the measure and it is applied in an even-handed manner, then basing a measure on PPMs does not inherently lead to a violation. (And even if it did, it would likely satisfy an exception, if we are talking about a GATT claim).

Comments

Hillman on Carbon Taxes and the WTO

Former AB Member Jennifer Hillman has a new paper on carbon taxes and WTO rules. Some excerpts:

Can such a carbon tax be applied in a way that
does not violate U.S. obligations under the WTO
Agreements? I believe the answer is yes, provided
that policymakers carefully design such a tax,
keeping in mind the basic requirements of the
WTO not to discriminate in favor of domestic
producers or to favor imports from certain countries over others. The key is to structure any accompanying border measure as a straightforward extension of the domestic climate policy to imports. If so
designed, there should be few questions about the
measure’s consistency with the WTO rules. Even if
questions were raised, the United States would have
strong defenses within the WTO system. And even
if those defenses were somehow to fail, the United
States would be able to make adjustments should
some aspect of its carbon tax system be found
wanting. A non-discriminatory tax enacted in good
faith to address climate change should pass muster
with the WTO. Therefore, the threat of WTO
challenges should not deter policymakers from
adopting a carbon tax system now.

...

If Congress enacts a carbon tax to address climate
change, streamline domestic energy policy,
raise revenues, or reduce distortions in the tax
system, it must be ready to address the competitiveness concerns of U.S. companies. It could do so by
applying the same tax to imports coming into the
United States as they apply to domestic goods in
order to ensure that everyone competes on a level
playing field and that everyone has the same incentive to reduce their carbon footprint. To ensure that
U.S. companies are not disadvantaged when they
try to export their products to foreign markets,
the carbon tax could be rebated to U.S. companies
whenever they export the products on which the
carbon tax was assessed.

Each of these steps is permitted under the WTO
rules provided: 1) that the tax is designed to fall
within the parameters of an “indirect” tax on products rather than a direct tax on the producers themselves; and 2) that any parallel taxes on imports or
rebates on exports do not discriminate in favor of
U.S. products. Policymakers have sufficient latitude
within this framework to design and implement a
carbon tax system that represents a good faith effort
to reduce carbon emissions while encouraging
all other countries to cut their emissions too, all
while preserving the competitive position of U.S.
companies. Policymakers can be bold. The WTO
will recognize genuine climate change measures for
what they are and is unlikely to find fault with such
measures, provided they do not unfairly discriminate in favor of U.S. companies.

As a WTO legal matter, that all sounds right to me.

But what about the issue of PPMs, which a friend of mine raised? There is a view out there that discrimination against like products based on their production or processing method violates WTO rules.

I don't know what Jennifer's thoughts are on this, but in my view recent WTO jurisprudence makes it fairly clear that measures will not violate WTO law simply because they affect the production or processing method. I don't want to get into all the provisions that might possibly come up in this regard, but just speaking very generally, it seems to me that if you can show a legitimate objective for the measure and it is applied in an even-handed manner, then basing a measure on PPMs does not inherently lead to a violation. (And even if it did, it would likely satisfy an exception, if we are talking about a GATT claim).